Why an Altcoin Could Beat Bitcoin

If you’d asked me early this year whether any altcoin could beat bitcoin, I’d have said: No.

And I did, in multiple conversations. “Bitcoin has the network effect. There’s no technology an altcoin can invent that Bitcoin can’t adopt. And for Bitcoin’s primary use case as a currency, it’s perfect. It’s the best form of money humanity has ever had.”

The attitude I had then is similar to what I saw expressed in the answers to Nick Zeeb‘s question at CoinSummit London 2014 in “VC Investment Opportunities in the Bitcoin Space.”

Nick asked, “Bitcoin’s obviously got the first-mover advantage. But my question for you is: Do you see any opportunities in the altcoin/appcoin space right now?”

The answer was “No,” and they didn’t even leave the door open for future unanticipated opportunities. Those on stage were at consensus: Bitcoin has won, and nothing can threaten its dominance in the cryptocurrency space. “There’s a gravitational force coming to Bitcoin rather than the others.”

The power law was mentioned, implying that Bitcoin would always dominate at many orders of magnitude above the competition.

Another pointed out that it’s not just first-mover advantage; the stats also skew heavily in Bitcoin’s favor, in terms of the number of developers and the number of companies starting in the space. “Betting against Bitcoin is like betting against Ethernet or HTTP. There were things wrong, but people fixed it.”

But the analogy doesn’t hold if the new technology is fundamentally different. Having published my first webpage in 1996, I remember the internet before Google. Far from being the first search engine, there were many others before the big G, including WebCrawler, Infoseek, Yahoo (back when they ran their own), Excite, and AltaVista.

I can understand the temptation to say that bitcoin is the ultimate winner: to some degree, it’s a self-fulfilling prophecy. You help make it happen by saying it’s going to happen.

Bitcoin is large enough now that I don’t think a competitor could succeed without giving bitcoin early adopters a stake. That’s why I think Stellar’s Bitcoin Program (in which 19% of the Stellars go to present bitcoin holders) is so brilliant. You need to give these people a stake. Any winning cryptocurrency must have this property of rewarding the early adopters. That’s harnessing the power of the network effect.

So this is why I’ve slowly come around.

“Altcoin” is a bit of a misnomer. When discussing altcoins in the past, it was always about Litecoin, Dogecoin, and (primarily) other proof-of-work-based coins. I believed then, and still believe now, that there’s no hope for any PoW-based coin. Not because of network effects, but because of security. My biggest concern is technical. This is an area where the PoW algorithm does not matter; in the long term, anything can be implemented in hardware. Given this inevitability, a “simple” algo like SHA256x2 is ideal.

With this traditional definition, Stellar is not really an altcoin. Yet it could become a digital currency competitor to bitcoin in the sense that it can be used as currency.

It’s inflationary, which I dislike: I’d prefer a currency that more obviously rewards savers. But in the long run, that may not matter as long as the inflation rate is perfectly predictable, transparent, and accepted.

And this quality of Stellar helps act as a differentiator. I’m under no illusions: my preference for deflation is unorthodox, and a currency with mild inflation may have a better shot at catching on with the masses. I’m not saying that Stellar will catch on, and my biggest concerns with it are technical; but from an economic and social perspective, I can’t dismiss it, or other digital currencies like it. Thus, Bitcoin could have viable competitors, one of which could someday overtake it.